Dividend Stocks

What’s a Canadian Dividend Aristocrat?

It’s a Canadian company showing 5 consecutive years with a dividend increase. Aristocrats are solid companies with a robust balance sheet. More on the specifics below.

Why it’s important to you?

Dividend growers tend to outperform the market over a long period of time and do it with less volatility. Dividend growers = more money, less stress. Investing in Canadian dividend growers should lead to recurrent investment income and help you achieve your retirement goals.

Can you invest in any Canadian Dividend Aristocrats and make money?

NO, but this Canadian Dividend Aristocrats guide will not only provide you with a list of stocks, but it will come with a methodology to select the right companies for your portfolio. We will also provide you with our favorite aristocrats.

Canadian Aristocrats and the U.S. Dividend Aristocrats

The Canadian dividend aristocrats is the little brother of a much larger and world-known dividend grower list. Dividend growth investors are familiar with the popular U.S. Dividend Aristocrats List. This list of dividend growers with over 25 consecutive years of dividend increases is famous around the world. What about Canadians? Do we have companies showing 25+ years of consecutive dividend increases?

While Canada does have a few companies that achieved that feat, the Canadian dividend aristocrats list would be too short if we would include them based on the US requirement. Canadian Aristocrats are companies that have increased their dividends for 5 consecutive years.

While many investors may think this is not enough to give an elite title to a company, I tend to disagree. I love picking stocks that have just started increasing their dividends and are on their way towards a great future. This is a unique opportunity for investors to select high-quality companies and still enjoy stock price appreciation going forward. We all wish we bought shares of Coca-Cola (KO) 50 years ago when it was a young dividend grower. You have a similar opportunity with the Canadian dividend aristocrats.

Skip directly to the good stuff, download our Dividend Rock Star List here:

Which Canadian stocks are Dividend Aristocrats?

As opposed to the U.S. Aristocrats, Canadian companies don’t have to show 25 years of consecutive dividend increases. In fact, even the 5 years minimum requirement isn’t as strict as we would think. Here’s the short list of requirements Canadian companies must meet to earn the Aristocrat title:

• The company’s common stock must be listed on the Toronto Stock Exchange and be a constituent of the S&P BMI Canada. Stocks listed on the TSX venture, aren’t eligible.
• The company’s market capitalization (Float-adjusted) must be at least $300M. We want companies of a minimal size. Yet $300M is quite permissive.
• The increase in regular cash dividends for 5 consecutive years, but companies could pause their dividend growth policy for a maximum of 2 years within a said 5-year period. In other words; as long as the company intends to share the wealth, it has a good chance of being included among the elite dividend growers.

Canadian aristocrats Vs. U.S. aristocrats

Needless to say, it is easier to become a Canadian aristocrat than a U.S. aristocrat! To become a U.S. aristocrat, companies must:

• Be a member of the S&P 500
• Show 25+ consecutive years of dividend increases
• Meet certain minimum size & liquidity requirements

It would be foolish to think selecting any aristocrats out of the list would make a good investment. On both sides of the border, we regularly see companies getting added or withdrawn for the list. This means the list you see in 2020 is those only who survived the test of time.

This article will not only provide you with a list of promising stocks, but it will also come with a methodology to select the right companies for your portfolio.

What are the Canadian dividend Aristocrats for 2022?

The list below contains 87 Canadian Dividend Aristocrats as of 2022. That’s a lot of companies that survived the 2020 pandemic. They are among the best Canadian dividend stocks. However, this list can be expected to change following the current pandemic situation. Dividends are one of the items companies tend to cut when feeling liquidity pressure.

You will also find very few Technology sector companies on the list as that sector has never been known for their steady cash payments to shareholders. You will, however, find many Financial Services companies along with some Industrials.  Those two sectors have been and continue to be well-established dividend payers.

3 Steps to select the right aristocrats for your portfolio

As previously mentioned, going “all-in” with Canadian aristocrats may not make your portfolio any better. After downloading the Canadian dividend aristocrat lists, you can apply the following steps to ensure you pick only the best stocks possible.

#1 Focus on the sector you need

Whenever you isolate certain metrics, you will notice that certain sectors will be generally strong. This is because each sector thrives or faces tailwinds at different times. The timing of your research will determine which sector offers you the best opportunities. Unfortunately, you can’t buy all your stocks from the same sector. The DSR recession-proof workbook will guide you in this regard.

I would rather buy the best of breed for each sector than buy 4 stocks from the same industry. This will help my diversification and smooth my total returns over time. For example, the fact I had many tech stocks in my portfolio protected me to some extent from the March 2020 crash. Tech, utilities and consumer defensive stocks held the fort while my financials, industrials and consumer cyclicals were getting killed. Even more importantly, that diversification helped my portfolio bounce back relatively quickly.

#2 Start with the dividend triangle

If you have been following me for a while, you know that I’m a big fan of what I call the Dividend Triangle. This simple focus on three metrics will reduce your research time and help you target companies with more robust financials. I start all my searches with a look at companies showing strong revenue growth, earnings growth and dividend growth over the past 5 years. The detailed explanation is found in our recession-proof workbook, and I invite you to read and re-read that workbook as necessary.

First, download the Canadian dividend aristocrats list. Then, in a few simple clicks, you will set the filters and you can start hunting for the best stocks for you at that moment in time.

By selecting only companies showing positive numbers in the 5yr Rev growth, 5yr EPS growth and 5yr Div growth columns, you will find those companies with a positive dividend triangle.

This methodology covers all “regular companies”, but not REITs and other businesses that use non-conventional metrics instead of EPS. We will address those types of companies later in this letter.

#3 Priority to dividend growth, not yield

Now that you have narrowed down the number of stocks, it is time to trim that list further. Throughout the years, most of my best stock picks have been found amongst the strongest dividend growers. When you think about it, it totally makes sense. Those companies must earn increasing cash flows and show several growth vectors to be confident enough to offer a 5%+ dividend increase year after year.

Past dividend growth is a result of several good metrics at the same time. This usually means stronger revenue, consistent earnings growth, increasing cash flow and debt that is under control. We’ll dig into the other metrics later, but at first glance, a strong dividend grower will likely come with other robust metrics.

While not all my holdings show such strong dividend growth, I always search for the strongest dividend growers when selecting a new stock for my portfolio.

Using this simple 3 step methodology will narrow down your search to a few stocks per sector. It will make your final selections easier and your portfolio will likely perform better over the long run.

How to Calculate a Fair Value for Canadian Dividend Aristocrats

Valuation does play a major role in the buying process. However, this should not be the single factor that determines whether you buy or not. This is one factor among many. To be honest, I would rather buy an “overvalued stock” with a strong dividend triangle, great growth vectors and lots of potential for the next 10 years than buying an “undervalued stock” that has nothing else but a good yield and a poor valuation.

When I find a company I really like, but the valuation seems ridiculous, I’ll be tempted to put it on a watch list and wait for a while. I usually build this watch list on the side and when I’m done with one of my current holdings (e.g. the company doesn’t meet my investment thesis anymore), I pull out the watch list and check to see if valuations have changed. Once again, I’ll pick any “Alimentation Couche-Tard” (overvalued, strong growth) over any “Suncor” (undervalued, modest growth) of this world.

PE Ratio

At DSR, we use mostly two methodologies to determine a stock’s valuation. The first one is to consider the past 10 years of price-earnings (PE) ratios. This will tell you how the stock is valued by the market over a full economic cycle. You can then determine if the company shares enjoyed a PE expansion (price grows faster than earnings) or if the company follows a similar multiple year after year.

Dividend Discount Model

When you look at stocks offering a yield of over 3% with a stable business model, the dividend discount model (DDM) could be of great use. Keep in mind the DDM gives you the value of a stock based solely on the company’s ability to pay (and grow) dividends. Therefore, you will find strange valuations when you look at fast-growing companies with low yields (e.g. Alimentation Couche-Tard!). Find out more about the DDM model and its limitations here.

While the idea of receiving dividends each month is seducing, this is not what makes dividend growth investing magic. It’s the combination of capital growth and dividend growth (read total return) that truly generates the magic in your portfolio. You can download the complete list with additional metrics such as P/E ratio, dividend growth, dividend yield, revenue growth, etc. by clicking on the following button.

Best Canadian Dividend Aristocrats for 2022

Searching through almost 100 stocks could become tiresome. Using the Dividend Stocks Rock investing methodology, I’ve selected my favorite Canadian Dividend Aristocrats. You can download a complete eBook on our best Canadian Aristocrats here.

Alimentation Couche-Tard (ATD.TO)

Business Outlook

In the long-term, dividend payouts should grow in the double digits, and investors should see strong stock price growth. ATD’s potential is directly linked to its capacity to acquire and integrate additional convenience stores. Management has proven its ability to pay the right price and generate synergies for each acquisition. ATD exhibits a solid combination of the dividend triangle: revenue, EPS, and strong dividend growth. The company counts on multiple organic growth vectors such as Fresh Food Fast, pricing & promotion, assortment, cost optimization and network development.

The mediocre 0.80% dividend yield is so low that ATD shouldn’t even be considered as a dividend grower. However, the dividend payout has surged in the past 5 years (+144%) and the stock price jumped by over 75% (taking into account the stock price drop in early 2020). The only reason the dividend yield is so low is that ATD is on a fast track to growth. ATD will continue steadily increasing its payout while providing stock value appreciation to shareholders.

Potential Risks

Growers by acquisition are all vulnerable to occasionally making a bad purchase. While ATD’s method of acquiring and integrating more convenience stores has proven successful, it is important for them to not grow too fast or become too eager, leading them to possibly overpay in the name of growth. The company acted in this way when they tried to acquire French grocery store Carrefour. Still, we don’t think the next acquisition should be a source of concern with the current management team. Since then, no other deal was on the table and ATD didn’t get as many accolades from the market. Investors are also worried about the potential impact of electric vehicles on fuel sales, but we believe ATD will overcome this challenge by installing superchargers.

Canadian National Railway (CNR.TO)

Business Outlook

Canadian National has been known for being the “best-in-class” for operating ratios for many years. CNR has continuously worked on improving its margins. The company also owns unmatched quality railroads assets. CNR has a very strong economic moat as railways are virtually impossible to replicate. Therefore, you can count on increasing cash flows each year. Plus, there isn’t any more efficient way to transport commodities than by train. The good thing about CNR is that you can always wait for a down cycle to pick up some shares. There’s always a good occasion around the corner when we look at railroads as attractive investments. Finally, the cancellation of the Keystone XL pipeline will drive more oil transportation towards railroads. CNR will benefit from this tailwind. CNR lost the bidding war for Kansas City Southern (KSU) to Canadian Pacific. Management is being challenged and we should see better growth ideas emerge out of this drama.

CNR has successfully increased its dividend yearly since 1996. The management team makes sure to use a good part of its cash flow to maintain and improve railways while rewarding shareholders with generous dividend payments. CNR shows impressive dividend records with very low payout ratios. While the business could face headwinds from time to time, its dividend payment will not be affected. Shareholders can expect more high-single-digit dividend increases.

Potential Risks

Railroad maintenance is capital intensive and could hurt CNR in the future. There is a difficult balance to reach between an efficient operating ratio and well-maintained railroads. Continuous (and substantial) reinvestments are required to maintain its network. However, CNR continues to show one of the best operating ratios in the industry. CNR’s growth could also get hurt from time to time as it depends on Canadian resource markets. When the demand is low for oil, forest, or grain products, CNR will obviously slow down accordingly. We saw how quickly the wind turns. For example, the pandemic caused a slowdown in weekly rail traffic of about 10% during the summer of 2020. When the oil price is low, trucking takes some business away from railroads. CNR is a captive of its best assets. You can’t move railroads!

Fortis (FTS.TO)

Business Outlook

Fortis invested aggressively over the past few years, resulting in strong and solid growth from its core business. You can expect FTS’s revenues to continue to grow as it continues to expand. Bolstered by its Canadian based businesses, the company has generated sustainable cash flows leading to 4 decades of dividend payments. The company has a five-year capital investment plan of approximately $20 billion for the period of 2022 through 2026. Only 33% of its CAPEX plan will be financed through debt, while 61% will come from cash from operations. Chances are that most of its acquisitions will happen in the US. We also like the company’s goal of increasing its exposure to renewable energy from 2% of its assets in 2019 to 7% in 2035. The yield isn’t impressive at 3.30%, but there is a price to pay for such a high-quality dividend grower.

Management increased its dividend by 6% like clockwork for the past 5 years and has declared that it expects to increase dividends by 6% annually until 2025. We like it when companies show motivation for growth (through acquisitions) and reward shareholders at the same time. After all, Fortis is among the rare Canadian companies who can claim to have increased their dividend for 48 consecutive years. Fortis is a great example of a “sleep well at night” stock.

Potential Risks

Fortis remains a utility company; in other words, don’t expect astronomical growth. However, Fortis’ current investment plan is enough to make investors smile. Fortis made two acquisitions in the U.S. to perpetuate its growth by opening the door to a growing market. However, it may be difficult for the company to grow to a level where economies of scale would be comparable to that of other U.S. utilities. The risk of paying a high price for other U.S. utilities is also present. Finally, as most of its assets are regulated, each increase is subject to regulatory approval. While FTS has a long history of negotiating with regulators, it’s possible to see rate increase demands being revised. Please also note that Fortis’ revenue is subject to currency fluctuations between the CAD and USD currencies.

Royal Bank of Canada (RY.TO)

Business Outlook

Royal Bank counts on many growth vectors: its insurance, wealth management, and capital markets divisions. These sectors combined now represent over 50% of its revenue. These are also the same segments that helped Royal Bank to stay the course during the pandemic. The company has made significant efforts in diversifying its activities outside of Canada and has a highly diversified revenue stream to offset interest rate headwinds. Canadian banks are protected by federal regulations, but this also limits their growth. Having some operations outside of the country helps RY to reduce risk and improve its growth potential. The bank posted impressive results for the latest quarters driven by strong volume growth and market share gains which offset the impact of low interest rates. As interest rates are expected to rise in 2022, RY is in good position. Royal Bank exhibits a perfect balance between revenue growth.

Royal Bank has traditionally increased its dividend twice per year. Under normal circumstances, an investor can count on two low-single-digit dividend increases each year. The bank paused its dividend growth policy between 2008 and 2010 but returned with double-digit dividend growth increases in 2012. Regulators put a hold on dividend increases for all banks in 2020 and Canadian banks and lifted it in late 2021. Royal Bank went with a generous dividend increase of $0.12/share or 11%. You can expect the bank to go back to a mid-single digit dividend growth rate.

Potential Risks

After the 2018 financial market crash, the bank focused on growing its smaller sectors. While wealth management should continue to post stable income, the insurance and capital markets divisions are more inclined to variable returns. There were concerns with Canadian Banks’ management of their provisions for credit losses as the RBC loan portfolio was affected by the pandemic with higher provisions for credit losses (PCL) in 2020. The good news for investors is that PCL has declined to pre-pandemic levels. While loans and deposits increased, interest rate margins will continue to put pressure on earnings. On the flip side, Royal Bank is highly exposed to the Canadian housing market and higher interest rates may affect this market.

Telus (T.TO)

Business Outlook

Telus has grown its revenues, earnings, and dividend payouts on a very consistent basis. Telus is very strong in the wireless industry and is now attacking other growth vectors such as the internet and television services. The company has the best customer service in the wireless industry as defined by their low churn rate. It uses its core business to cross-sell its wireline services. The company is particularly strong in Western Canada. Telus is well-positioned to surf the 5G technology tailwind. Finally, Telus looks at original (and profitable) ways to diversify its business. Telus Health, Telus Agriculture and Telus International (artificial intelligence) (TIXT.TO) are small, but emerging divisions that should lead to more growth going forward.

This Canadian Aristocrat is by far the industry’s’ best dividend payer. Telus has a high cash payout ratio as it puts more cash into investments and capital expenditures. Capital expenditures are always taking away significant amounts of cash due to their massive investment in broadband infrastructure and network enhancement. Such investments are crucial in this business. Telus fills the cash flow gap with financing for now. At the same time, Telus keeps increasing its dividend twice a year showing strong confidence from management. You can expect a mid-single digit increase year after year.

Potential Risks

As competition increases among the Big 3 and with the arrival of Shaw Communications (SJR.B.TO) in the wireless market, future margins could be under pressure. Plus, the Federal Government would like to see more competition for the “Big 3” and will likely open the doors for new competitors going forward. Telus will eventually have to think about other growth vectors once the wireless market becomes fully mature. TV & internet will not be enough to avoid Telus becoming another Verizon (VZ) in 10 years. Finally, Telus’ debt has increased substantially from $12B in 2015 to $21B in 2022. As interest rates remain low, it is a good strategy to use leverage. However, this situation will not last forever since interest rates are now rising.

I know how hard it is to invest when stocks don’t seem to trade at their fair value

Don’t you hate not knowing when to buy or sell stocks? There are too many investing articles contradicting one another. This creates confusion and leaves you with the impression you may not reach financial independence. It doesn’t have to be this way. We have created a free, recession-proof portfolio workbook that will give you the actionable tools you need to invest with confidence and reach financial freedom.

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1. Invest with conviction and address directly your buy/sell questions.
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Disclaimer: I hold shares of ATD.B, FTS, T, RY, CNR.